When you invest in the commodity market, you may be spoilt for choice. There are various types of commodities available to be traded in the market. Broadly, they are categorised as soft and hard commodities.
A soft commodity is a general term that is used for commodities grown on agricultural farms, rather than mined from the earth or extracted from other substances. Corn, wheat, soybean, and sugar are some examples of soft commodities.
Soft commodities have a limited shelf life and they are highly prone to damage due to bad weather. As such, their prices tend to be volatile in the short term. In fact, the weather plays a huge role in determining the prices of soft commodities. The prices of soft commodities can move sharply with sudden changes in a weather forecast.
A hard commodity is a type of commodity that is either mined from the earth or extracted from natural resources. Gold and crude oil are examples of hard commodities. Some hard commodities are also produced by refining other commodities. For example, gasoline is produced by refining crude oil.
Hard commodities are easier to store than soft commodities because they are not perishable. Besides, the weather does not have a direct impact on their production and supply. As such, the market for hard commodities is generally less volatile in the short run than the market for soft commodities. The prices of hard commodities depend more on global macroeconomic fundamentals, such as GDP growth, industrial production, and interest rates.
The types of commodities you choose to trade definitely affects how you trade and what yields you can expect. This is because time is often a big factor in such decisions.